SNDK: Goldman Ups Target to $52 on Tight NAND Supply

By Tiernan Ray

Goldman Sach’s James Schneider this morning reiterates a Buy rating on shares of flash memory chip SanDisk (SNDK), and raises his price target to $52 from $45, writing that an improvement in NAND prices over the summer can persist the rest of this year and into next, given supply cuts and upside to demand.

Without changing any estimates, Schneider writes that SanDisk’s gross margin can go higher with “lean supply and a positive product mix shift,” and notes that the shares are “highly correlated with gross margin trends.”

Among the factors that Schneider cites are “push-outs” at several NAND makers, constraining supply:

After a significant oversupply situation in 1Q12 and 2Q12, a number of NAND vendors have either cut wafer capacity or pushed out new capacity additions. Samsung took 70k WSPM in NAND capacity offline at its Austin fab in July and converted it to logic. Hynix pushed out further capacity expansion until 2013 or beyond (relative to the 40k wafer capacity it originally anticipated). Toshiba temporarily cut 30% of its NAND production for a 2-3 month period. Nearly all other suppliers (including Micron and SanDisk) pushed out further capacity expansion until 2013 or later. Based on our own industry checks as well as on public commentary from several major NAND vendors, we do not expect any meaningful capacity additions from major NAND vendors through mid-2013. Depressed margins overall in the industry will act to keep new capacity from entering the industry through “mid-2013,” Schneider thinks.

As far as demand, NAND demand, which has cooled, has settled into a “steady” 40% “bit growth” pattern that is sustainable with present capacity, he thinks.

Schneider also sees upside, however, to demand if solid-state drives using NAND catch on in PCs this year, helped by new technology Samsung Electronics (005930KS) is developing:

Samsung recently announced a consumer SSD based on three-bit-per-cell (or TLC) NAND, which has a substantial (20%-30%) cost-per-bit advantage over MLC. Importantly […] The biggest barrier to SSD adoption in the client market has been cost, and we think TLC SSDs could drive meaningfully higher SSD adoption by lowering the costs of primary SSD storage and narrowing the price gap relative to HDDs.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.